What is Cash Flow Management? Importance and Tips

Cash Flow Management empowers you to check, assess, and adjust the cash-flow/income of your company in a manner that you do not face cash-crunch issues.

Adept management of cash flow is fundamental for the sustainable existence and exponential growth of any business. It is genuinely required for any business/organization – whatever the size of the business is.

By managing the cash flow, you will be able to identify the sources and amount of cash inflowing into your business as well as the amount and places of the money outflowing from your business. So, all in all, the process revolves around inflow management and outflow management of the cash.

It lets business owners have the projected figures necessary for the survival of a business and accomplish the business objectives. Sustaining working capital is a challenge that can be addressed dexterously via Cash Flow Management. Let us delve into the concept of managing cash flow to understand the best ways of ensuring this for any business model-

Table of Contents

Introduction to Cash Flow Management

Many times in businesses we’ve heard ‘Cash is the real king’, which means that cash flow is the blood- that keeps the heartbeat secured to sustain the kingdom. Undoubtedly, cash flow is one of the most critical points of a company that plays a significant role in its success, whether small or giant. If there is no cash, the profits are negligible.

Hence, it becomes necessary for all business firms to learn cash flow management for their excellence. Many giant companies often end on becoming bankrupt due to their insufficient cash flow management. Businesses that don’t practice cash flow management do not sustain in the market for the long term.

Cash is certainly the duke when it comes to run financial management to ensure the maximum profit. The delay between the payment between your suppliers, employees, and customers often occurs due to the reduced cash flow management. In simple words, cash flow management means to avoid the delays in cash flow as much as possible and to encourage others who owe you money to repay quickly.

In this article, we’ll cover all the necessary cash flow management points and how a company can maintain a stable cash flow to run the business activities smoothly.

What is Cash Flow Management?

Cash flow management isn’t as complicated as it seems; it is merely the activity of managing business incomes concerning its expenses and losses. The main aim while practising cash flow management is to ensure a positive cash flow by implementing all the required strategies to upgrade the value of your cash assets.

Remember, Cash flow and Profits are not the same terms; many businesses get confused in them. These two terms are entirely different from each other. Cash flow is a fluid aspect that refers to the inflows and outflows of the cash of the firm, while profit is the amount left after deducting all the expenses from the revenue generated.

A business can earn high profits but can lack insufficient cash flow, which harms the firm in the long run. Therefore, efficient cash flow management is essential to run all the business activities properly.

How Can We Manage the Cash Flow?

Many companies lack inefficient cash flow management. It begins with creating a cash flow statement, but this is not a balance sheet or income statement. Both of them are different aspects that measure different points in the financial management of a business.

Generally, it is crucial to practice cash flow analysis every month. If the business is finding issues maintaining stable cash flow, you might want to perform the cash flow analysis more often than a monthly basis. If you’re going to manage the cash flow, the company will require some necessary information for the analysis.

• Cash in hand
• Total cash receipts and cash payments
• A list of expenses occurred in the production
• Amount of cash for goods sold

To practice an efficient cash flow analysis, the business needs to measure the amount of cash in hand, total cash receipts and cash payments, list of estimated expenses, and amount of goods sold in cash. The analysis can be done on a weekly, monthly, or quarterly basis, as per the business firm’s suitability.

What is the Need of Cash Flow Management?

Cash flow management is the measure of the liquid assets or the cash assets present in the business. Regardless of how much profit the company is earning, if it doesn’t have enough cash in hand, the business will find it hard to pay to its suppliers, mortgage payments, rents, employees, or even yourself.

Stable cash flow shows that the company has found an accurate way of balancing the cash flow with its spending and earnings. Whereas, a negative cash flow indicates the poor management of cash flow, as the expenses of the company are too high, and the customers are paying their invoices. Performing effective cash flow management provides businesses to identify unexpected crises and trends.

Understanding the importance of cash flow management is necessary to prepare the business to achieve long term goals and objectives. If you don’t have an idea of the cash coming in and going out of your business, then it will harm the firm in the long run. Cash flow analysis allows you to identify whether the company is in a state to go for loans or not. If the business has been diligent since the beginning of cash flow analysis, they’ll know that the loan isn’t a tremendous financial stressor and will undoubtedly help them expand.

What to do when you wind up in a Cash Crunch? 

To begin with, you should pay heed upon the factors that channelize the cash flow in your business and the ways through which you can take their control. The key factors that have the best effect on cash flow-

• Accounts Receivable (duration between creating the invoice and keeping the cash)
• Accounts Payable (duration between accepting the invoice for buys made and your payment)
• Inventory (duration between paying for the materials and depositing the cash from the sales of the item)
• Capital expenditures (money out to make the buy versus recording devaluation cost over the valuable life)

Now, we will talk about some of the easy tips that will help you in coming out of the cash crunch situation-

1. Get Money!

You should issue invoices as rapidly as possible. You should continuously pursue unpaid invoices, and for this, you may call the client week after week. Then in the next step, you may involve the proprietor or owner of the company.

You should make a written Invoice Collection Policy and follow it. Be ready to take legal actions if invoices are not being cleared. You may also restructure your invoice by specifying the date the payment is expected or due.

2. Clutch your cash as long as possible

You should prioritize the payment of invoices and pay the most significant one first. Also try to minimize late fees, penalties, and other charges by paying such invoices and charges on time.

You should also speak with your lender as soon as possible and try some negotiations like interest-only payments on loans for the next few months and so forth. You need not guarantee anything you can’t pay.

Ask suppliers for extended payment terms. It is always useful to opt for new providers that offer longer payment terms. Consolidating loans is also a prudent practice to come out of cash crunch situations.

3. Convert Assets into Cash for ensuring proper Cash Flow

Numerous approaches are there to make money from the assets. You can auction outdated stock, unused hardware; whatever else you have around that is not bringing in cash. You can find many options for selling off outdated inventory such as Pawn shops, eBay, Craig’s List, etc.

You may also consider selling your accounts receivables to any of the factoring companies, as they will purchase your account receivables, at a rebate and you will get the money rapidly.

You may also utilize leasing companies for selling and afterwards leasing back your existing assets, for example, hardware, gear, PCs, software, and so forth. You can also utilize the stock you have to get a loan or line of credit.

Now, after knowing about the best ways of coming out from a cash crunch situation, let us have a look upon the different components of Cash Flow Management-

Components 

Four components help you in managing your cash, and they are-

• Having an organized filing system
• Having a monthly expense report
• Having a monthly income report
• Having a Cash Flow Management Report

Tips to have a Stable Cash Flow

Undoubtedly, performing an efficient cash flow requires money, time, and a lot of effort, though the results are always worth it. Here are a few tips that will help the companies to maintain a stable cash flow smoothly.

1. Plan a Budget

A budget is an essential tool of every business, without which it becomes difficult to track the business’ cash flow. The budget tells you how you can allocate your resources to get the maximum output. Efficient budgeting makes sure that business is performing accurate cash flow analysis and avoids overspending.

2. Observe the current cash trends in the market–

The great advantage of preparing cash flow analysis is that even at times of difficulty you can look at it and find the areas where the company spent and earned.

For instance, if the cash flow issue occurs anytime, you can review the past incomes and expenses to find what are causing the changes in cash flow and how you can deal with them.

3. Keep track of all the expenses–

Efficient budgeting makes it easier to categorize the expenses more accurately. The categorizing of expenses makes the analysis easier to understand to determine how the costs are benefitting the businesses.

If you find that a particular expense isn’t providing you with any tangible benefit, then you might take to another step to scrutinize it.

4. Reduce the expenses wherever possible–

If you have a negative cash flow, look for areas where you spent the most cash because your expenses are way too much.

Some necessary expenses such as rent, interests, and debts are not negotiable, therefore look for those expenses that can be reduced and neglected to prepare the company for the seasonal rush.

5. Keep track of pending payments and invoices–

The business should closely monitor all the pending payments and invoices to find the estimated cash flow. Also, make sure that you are paying all your expenses on time so that nothing is overlapped.

Proper monitoring is necessary for big companies that have huge payments and invoices pending, such as interests and taxes. You don’t want to risk your cash flow analysis in any case.

Cash Flow Management Wrap Up!

The best way to keep the situation under control is to monitor the cash flow statements regularly to determine the state of cash flow if it is negative or positive. With proper cash flow projections, you can make the necessary decisions for the businesses that will benefit you in the long run.

Optimistic cash flow determines that you have more cash incomes in your business than the outflow of cash it prepares you for the future crisis and challenges to sustain the business in the market. With an efficient cash flow analysis, the business won’t be able to pay off its regular expenses such as rents, salary, wages, buying raw materials, and many more.

If you’re finding it hard to follow your cash flow plans, then look for small businesses financing plans to create easy budgeting to benefit the business.

Do not consider any loans in the negative cash flow, as it will become a financial stressor for the company. Before going loans, make sure to evaluate all the pros and cons to get a fair idea of how it will impact the cash flow analysis.

Have you ever faced cash crunch issues? What did you try to manage cash at that time?

Do you have some other cash flow management strategies? Tell us in the comment section below.